Tag: Internal controls or lack thereof

Ohio County Auditor Discovers an Ongoing 30-Year Tax Mistake

After a massive flood in the Ohio county of Butler March 25, 1913, the Miami County Conservatory was formed to preserve the quality of Great Miami River water. This mission, hammered out in 1914, allowed for a tax against Butler County residents but apparently when this tax was raised in 1976, it didn’t actually go in front of Butler County votes like it was supposed to.

Which means $4 million in taxes has been collected since then ($252,793.74 in 2009) and somehow no one noticed until now.


Via the Oxford Press (OH):

Following an internal review and opinion from the Ohio Department of Tax Equalization, Butler County Auditor Roger Reynolds is removing the tax from the 2010 bill.

“I am proud of my office for this discovery, and for instituting our plan for stronger internal controls on behalf of the citizens of Butler County,” Reynolds said in a press release. “Our role as government leaders must be to protect taxpayers’ money, and to safeguard against waste and error.”

The tax is allowable according to Ohio law. A 1914 statute states taxes for a conservancy district can be collected up to 10 mills, but anything greater must have voter approval.

The funny part is that according to Miami Conservatory District PR, the county is only obligated to pay $207,982 a year to the conservatory. So they really over-collected.

This county auditor is the same who caught another tax boo-boo in early 2010 in which a $1.46 assessment was wrongly collected from every parcel of land in the county for a grand total of $2.3 million.

And you guys wonder why tax protesters do what they do.

SEC’s Storied Tradition of Producing Unreliable Financial Statements Makes for an Awkward Situation

Namely, the Commission would like a bigger budget because Dodd-Frank is making their lives increasingly difficult but since they got such bad marks from the GAO the Times reports that it might be just a tad inappropriate since, ya know, the SEC’s own numbers are, arguably, unreliable:

Since the commission began producing audited statements in 2004, the Government Accountability Office has faulted its reporting almost every year. Last November, the G.A.O. said that the commission’s books were in such disarray that it had failed at some of the agency’s most fundamental tasks: accurately tracking income from fines, filing fees and the return of ill-gotten profits.

“A reasonable possibility exists that a material misstatement of S.E.C.’s financial statements would not be prevented, or detected and corrected on a timely basis,” the auditor concluded.

The auditor did not accuse the S.E.C. of cooking its books, and the mistakes were corrected before its latest financial statements were completed. But the fact that basic accounting continually bedevils the agency responsible for guaranteeing the soundness of American financial markets could prove especially awkward just as the S.E.C. is saying it desperately needs money to increase its regulatory power.

S.E.C. Hurt by Disarray in Its Books [NYT]

Accountant Sets Bar for Idiotic Embezzlement Schemes

The snatch and grab and burn technique isn’t the most sophisticated plan we’ve read about but we are talking about a man who is an accountant first (we’re guessing a very bad one) and an extremely dimwitted criminal second:

An accountant faces seven years in jail after a court convicted him yesterday of deliberately setting fire to Dh250,000 in cash and stealing a similar amount from the taxi company where he worked.


Why this particular accountant-cum-thief decided half the money wasn’t worth his trouble is unclear but what is CRYSTAL is that setting the remainder on fire was the equivalent of writing “I’M EMBEZZLING FUNDS” with a Sharpie™ across the cash ledger.

According to the arraignment sheet, prosecutors said [the accused] deliberately set fire to the money bag which contained Dh500,000. He burned Dh250,000 and stole the rest.

He was also charged with causing intentional damage and financial loss to the company. The company’s Indian manager testified that one of the employees informed him over the phone that the accounting office was on fire.

“I rushed to the company’s premises to check what happened. We had left nearly half a million dirhams in a money bag which we kept inside a wooden cupboard. The money was our drivers’ daily revenues. I discovered that half of the money got stolen and the remaining half was burned,” the manager told prosecutors.

But to be fair to our asshat accountant du jour, “a money bag which we kept inside a wooden cupboard” isn’t the most secure internal control procedure we’ve ever heard of. Let this be a lesson.

Nun-cum-former CFO, Who May Have a Gambling Problem, Allegedly Made Off with Some Iona College Cash

We’re a few days late to this story so save the indignation, it’s still worth mentioning.

Sister Marie E. Thornton (aka Sister Susie) was doing the Lord’s work as the CFO at Iona College in New Rochelle, NY and it appears that she was embezzling around $80k a year for nearly 10 years to fund a wee bit of a gambling problem. She surrendered to authorities last week over said embezzlement of ‘more than $850,000,’ according to Talk of the Sound, a New Rochelle blog, that quotes a DOJ press release.


The school fired Sister Suz last year, along with another employee, in relation to the embezzlement and the DOJ got around to charging her last week.

The story got picked up by several outlets, including Fox News who reported that Sister Suz had been blowing the money on trips to Atlantic City:

As chief financial officer at Iona College in New Rochelle, N.Y. from 1999 to 2009, Sister Marie Thornton, 62, bet her six-figure income and school money away during frequent trips to Atlantic City, federal prosecutors said.

Thornton was arrested Thursday and pleaded not guilty in federal court in Manhattan. She was released without posting bail. Sources confirmed to MyFoxNY that a former Iona basketball coach has said that Sister Marie definitely had a gambling problem.

Now why the former coach, Jeff Ruland (who was fired from his job, according to the Post), felt obligated to dish on the gambling issue is not clear, although it does provide a motive for Sister Susie’s (alleged!) stealing, which would have probably come out of the investigation. Odd revenge theories aside, the good news is that Sister Suz had seen the error of her ways and has been “cloistered at the Sisters for St. Joseph Order, near Philadelphia,” according to the Fox News report.

However, that is a lot closer to AC, so maybe we’re jumping the gun on repentance.

BREAKING: Sister Susie Arrested, U.S. Attorney Charges Former Iona College VP of Finance in $1.2 Million Embezzlement [Talk of the Sound]
Nun Accused of Embezzling $850,000 From College, Then Gambling It Away in Atlantic City [Fox News]
Nun charged with embezzling $1.2M from Iona [NYP]

GAO: SEC Basically Needs to Replace Their Entire Accounting System

“These material weaknesses are likely to continue to exist until the SEC’s accounting system is either significantly enhanced or replaced, key accounting activity in other systems is fully integrated with the accounting system at the transaction level, information security controls are significantly strengthened, and appropriate resources are dedicated to maintaining effective internal controls.”

~ From a report issued by the Government Accountability Office

Duoyuan Printing Is All Kinds of Screwed Up After Firing Deloitte

By “all kinds of screwed up” we mean “screwed 17 ways to Sunday”. After firing Deloitte last week, two top DY executives (CEO Christopher Holbert and CFO William Suh) have bailed, DYP shares are in the tank (down 47% as of publication) and, oh, they’re going to need to find a new audit committee chairman as their last one, James Zhang, ran for the hills.

Before running, however, he sent this really nice note explaining his motivations:

To: The Board of Duo Yuan Printing(DY).

6th Sept, 2010.

Dear Mr. Chairman and the follow directors of the Board:

Subject: My resignation as Company Audit Committee (AC) Chairman and Independent Director with immediate effect.

It has been almost one year since DY listed in the NYSE. I have to say that working closely with the Chairman, CEO and CFO of the company has been a great pleasure for me.

From Roughly one month ago, I got the phone call from Frank Li, the Audit Partner of Deloitte (DT) to express concerns to the Audit Committee over several financial irregularities and management control weakness. After hearing the full story, I immediately called an AC meeting and upon receiving unanimous approval from the AC as a well as support from the Chairman, the AC immediately engaged Latham Watkins, the US Law Firm, to handle the independent investigation not only to report back to the AC, but also as a part of the audit process requested by DT to give an opinion to the 2010 DY company financials. As our Chairman put it in the board Meeting just now that maybe due to the cross culture differences between US style work and maybe because of the second tier management don’t fully understand the US listing requirements, the investigation has not progressed in the last month. This delay could potentially render the company not filing its annual financial statements on time to the SEC.

In the past week, the Management has suggested to change the auditors of the company from DT to Frazer Frost (FF) who was the company prior auditors. This proposal has just been resolved in the full board meeting and Full AC meeting with voting taking place of 4 against 3 in favor and 2 against 1 in favor.

As the AC chairman and independent Director of the company, I respect the company democratic decision process as stipulated by the company Memorandum and Articles of Association. However, as a qualified UK Chartered Accountant and a trained Professional, I have brought to the attention of the board the following potential risks related to the change of auditors. These risks can be summarized as follows:

1. FF has not yet signed engagement letter with the company which is a risk to the company.

2. Change of auditors during the investigation process could potentially lead to further investigation from the SEC.

3. To change from a Big4 audit firm to a non-Big4 could have very negative impact in the investment community in terms of corporate governance thus lead to potential share price drop and subsequent US class law suit.

4. Even the Company US counsel has indicated in the meeting against change of auditors at this particular time frame.

Keep it classy, JZ, and good luck wherever you end up after this disaster of a company.

KV Pharma Names New CFO; Hunt for Auditor, Signs of an Internal Control System Begins

The AP reports that K-V Pharm named Tom McHugh as their new CFO today which is good news for KV but could be some serious bad news for Tom.

As you may recall, things haven’t been as good as you could ask for over at KV this year – directors, auditors and executives are all bolting for the door and someone has to make a run at this thing. One of those lucky ducks is Tom McHugh:

K-V Pharmaceutical Co. on Thursday named Chief Accounting Officer Thomas McHugh as its new chief financial officer, replacing Stephen Stamp after three months.

The company said McHugh becomes its CFO effective immediately. McHugh served as the company’s interim CFO from September 2009 until April 2010. He was named chief accounting officer in February.

So it sounds like Tommy probably knows the place well enough but he still gets to fix all this:

“Material weaknesses have been identified and included in management’s assessment in the areas of entity-level controls (control awareness, personnel, identification and addressing risks, monitoring of controls, remediation of deficiencies and communication of information), financial statement preparation and review procedures (manual journal entries, account reconciliations, spreadsheets, customer and supplier agreements, stock-based compensation, Medicaid rebates and income taxes) and the application of accounting principles (inventories, property and equipment, employee compensation, reserves for sales allowances and financing transactions).”

And find an auditor! Since KPMG quit, the hunt is on for a new one, so hopefully there’s someone in St. Louis willing to help them out because…the NYSE kinda, sorta took notice that the company didn’t file their 10-K on time and well, that’s a no-no. Just ask Koss.

So the good money is probably is riding against Tom but we’re rooting for you buddy. Turn this ship around!

K-V Pharma replaces CFO after 3 months [AP]

KPMG Has Gotten Tired of KV Pharmaceutical’s Financial Reporting Side Effects

Last week we ran a post courtesy of Sheryl Nash at CFOZone that discussed the tough 2010 that KV Pharmaceutical was having. Well, it’s getting worse. KPMG, not completely adverse to risk,ps and has dropped KVP like a sack of spuds.

In an 8-K rammed through just before quitting time yesterday, “On June 25, 2010, KPMG LLP (“KPMG”) notified K-V Pharmaceutical Company (the “Registrant” or the “Company”) that it had resigned from its engagement as the Registrant’s principal accountant. KPMG’s resignation was not recommended or approved by the Audit Committee of the Registrant’s Board of Directors.”

What was the problem, you ask? Where do we start? There’s a lot in this 8-K so we’ve bolded the good parts for you:

KPMG’s report on the consolidated financial statements of the Registrant and subsidiaries as of and for the year ended March 31, 2009 contained a separate paragraph stating that “As discussed in Note 3 to the consolidated financial statements, the Company has suspended the shipment of all products manufactured by the Company and must comply with a consent decree with the FDA before approved products can be reintroduced to the market. Significant negative impacts on operating results and cash flows from these actions including the potential inability of the Company to raise capital; suspension of manufacturing; significant uncertainties related to litigation and governmental inquiries; and debt covenant violations raise substantial doubt about the Company’s ability to continue as a going concern.”

The audit report of KPMG on the effectiveness of internal control over financial reporting as of March 31, 2009 did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles, except that KPMG’s report indicates that the Registrant did not maintain effective internal control over financial reporting as of March 31, 2009 because of the effect of material weaknesses on the achievement of the objectives of the control criteria and contains an explanatory paragraph that states “Material weaknesses have been identified and included in management’s assessment in the areas of entity-level controls (control awareness, personnel, identification and addressing risks, monitoring of controls, remediation of deficiencies and communication of information), financial statement preparation and review procedures (manual journal entries, account reconciliations, spreadsheets, customer and supplier agreements, stock-based compensation, Medicaid rebates and income taxes) and the application of accounting principles (inventories, property and equipment, employee compensation, reserves for sales allowances and financing transactions).

We’ll interject here with…why didn’t they just admit, “We have internal controls in place but they suck. Every last one of the controls is ineffective and we’re really not sure they’re being performed anyway. In fact, we don’t even employee people with accounting degrees. We have a weekend COSO crash course to get temps up to speed.” ?

Back to the filing:

As of the date of their resignation, KPMG had not completed the audit of the consolidated financial statements and the effectiveness of the internal controls over financial reporting of the Registrant as of and for the year ended March 31, 2010. KPMG had informed the Audit Committee prior to the date of their resignation that upon completion of their audit of the consolidated financial statements as of and for the year ended March 31, 2010 they expected their audit report would contain a separate paragraph expressing substantial doubt about the Registrant’s ability to continue as a going concern and their report on internal controls over financial reporting would indicate that the Registrant did not maintain effective internal control over financial reporting as of March 31, 2010 because of the effect of material weaknesses reported as of March 31, 2009 that had not been remediated.

We’d continue but it’s probably not necessary.

A Wisconsin Non-Profit Learns an Important Lesson in Internal Controls

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What is in the water up in America’s Dairyland? We’ve been going on and on about the internal control failures at Koss in Milwaukee but now there’s more of it at a non-profit organization just up the road. Let’s hope everyone at UW Madison is taking notes.

The latest tale of non-profit fraud stars 56 year-old Leonard V. Lauth of Beaver Dam.

Wings Over Wisconsin bills itself as a conservation organization dedicated to natural resource preservation and education through youth and community involvement. Spelling errors and obvious lack of updates since 2006 on its website aside, WOW manages nearly 1,300 acres of land and provides mostly young hunter education to the future gun-toting blue-stater babes in Wisconsin.


While it prides preservation of Wisconsin’s precious wetlands, internal controls do not appear to be high on WOW’s priority list. Hopefully this changes that.

It’s a textbook fraud case, starting with the mounting medical bills and the poor internal controls that allowed its Treasurer to lift $16,875 since 2005. Lauth’s advanced methods of fraud include writing checks to himself labeled “office supplies” in the books and taking home banquet funds after the event insisting he’d deposit them at the bank in the morning.

While typically WOW practice to require two signatures, Lauth had been with the organization for 24 years, leaving the “trust” issue totally taken care of. Opportunity, motive, what else do we need?

Rationalization, of course! Lauth told Beaver Dam Police Lt. Joel Kiesow he thought he’d taken $788 from the organization in the four year period in which he executed his fraud. When informed it was more like $17,000, Lauth was shocked. I guess he didn’t realize how expensive “office supplies” can be these days.

“Maybe I was robbing Peter to pay Paul on different things,” said Lauth in regards to using WOW funds to pay off family medical bills. Actually, he was robbing the little Dustins and Bobbys with their baby shotguns and wildlife of Wisconsin who counted on the funds to which he so sloppily helped himself. Shame shame.

Let this be a lesson to all you non-profits: cash management and financial literacy (including fraud prevention measures) are not only best practices for public companies and private industry. If anything, non-profits need sharper internal controls – without shareholders to answer to, money can easily slip into the fraud vacuum undetected for years, as in the case of Mr Lauth and WOW.

Calls to WOW left after business hours were not returned.

Man accused of taking funds from non profit [Beaver Dam Daily Citizen]